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Financial Reporting Quality And The Choice Of Monitoring Mechanisms In Debt Contracts: Evidence From Borrowing Base Restrictions
Sunay Mutlu
Borrowing base restrictions are common debt contractual features which limit the amount available to the borrower based on its working capital assets. The lender determines the availability of credit to the borrower based on the success of borrowing base assets. Identifying the unique setting of borrowing base restrictions, I examine whether financial reporting quality affects the choice of monitoring mechanisms that lenders use in debt contracts. I find that borrowers with low quality financial statements are more likely to access borrowing base lines of credit, as they face high adverse selection costs in non-borrowing base lines of credit. Accordingly, I …